Hawkish central bank boss refuses to rule out US recession after new rate rise

Jerome Powell (R) with Federal Reserve Vice Chair Lael Brainard (C) and Federal Reserve Bank of New York president and CEO John Williams (L) at the Wyoming symposium. Photo / AP

Jay Powell refused to rule out a recession in the world's largest economy as the Federal Reserve implemented a third consecutive 0.75 percentage point rate rise and published a much gloomier set of projections.

Powell's downbeat commentary on the economy came as the Federal Open Market Committee lifted its benchmark interest rate to a target range of 3 per cent to 3.25 per cent this week and signalled an intention to keep monetary policy tight as it fights soaring inflation.

"No one knows whether this process will lead to a recession or if so, how significant that recession would be," Powell said in response to a question about whether higher rates would hurt the economy.

Avoiding such an outcome would depend on how quickly wage and price inflation abates and whether the red-hot jobs market starts to cool down, he added.

"The chances of a soft landing are likely to diminish" because monetary policy needs to be "more restrictive or restrictive for longer", Powell warned during a press conference following the rate rise announcement.

His remarks followed the publication of a new "dot plot" of Fed officials' interest rate projections that reinforced the central bank's commitment to a "higher for longer" approach.

The forecast showed the benchmark rate rising to 4.4 per cent by the end of this year before peaking at 4.6 per cent next year.

The dot plot was much more hawkish than in June, when it was last updated. At the time, officials predicted the fed funds rate would reach just 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024

Echoing language he used at the Jackson Hole symposium of central bankers last month — when he delivered his most aggressive message since he was appointed to the top job at the Fed — Powell said: "We will keep at it until we're confident the job is done."

The FOMC, which said the rate rise was unanimously supported by policymakers, said it "anticipates that ongoing increases in the target range will be appropriate".

Powell's gloomy remarks sparked a sell-off in financial markets, with stocks giving up earlier gains.

The benchmark S&P 500 closed down 1.7 per cent, its second consecutive day of losses, while the tech-heavy Nasdaq Composite declined 1.8 per cent.

In volatile trading, the two-year Treasury yield, which moves with interest rate expectations, hovered near a 15-year high of 4.1 per cent immediately after the Fed released its statement.

Bryan Whalen, co-chief investment officer at TCW, said the Fed had reiterated its "hawkish message" and completely eliminated any hope for a more dovish message.

"What jumps out are the dots for 2023 and the difference between the dots and the market," he said.

"The Fed is going to get to 4.6 per cent through 2023, while the market has a 0.5 percentage point cut by the end of the year."

Fed officials also published a more downbeat set of economic projections that showed higher unemployment and lower growth, albeit not a recession.

They forecast the unemployment rate rising from its current rate of 3.7 per cent to 4.4 per cent in 2023, where it is expected to stay until the end of 2024. By 2025, the median estimate edged down to 4.3 per cent.

Over the same period, annual growth in gross domestic product is set to slow dramatically to 0.2 per cent by the end of the year before registering a 1.2 per cent pace in 2023 as "core" inflation drops from the 4.5 per cent level forecast for year-end to 3.1 per cent.

As of July, the Fed's preferred gauge, the core personal consumption expenditures price index, stood at 4.6 per cent.

Growth is set to stabilise just shy of 2 per cent in 2024 and 2025, when officials finally expect core inflation to move closer to the Fed's 2 per cent target range.

In June, policymakers projected that as inflation fell closer to the Fed's target of 2 per cent, growth would slow to only 1.7 per cent. Most economists already expected the US economy to tip into a recession next year.

The September meeting marked an important juncture for the Fed, which has faced questions this summer over its resolve to restore price stability after Powell suggested the central bank was starting to worry about overtightening.

Written by: Colby Smith and Kate Duguid
© Financial Times